History of Child Tax Credit
The child tax credit (CTC) was created in 1997. The CTC is essentially a federal grant program. It is estimated that more than 30 million households are eligible for the CTC that requires annual distributions of funds.
The IRS is the only agency equipped to handle such a huge continuing grant program. The IRS distributes tax refunds every year to millions of taxpayers who pay withholding taxes, estimated tax payments, and taxes assessed by tax returns.
As originally conceived, the CTC was a nonrefundable tax credit. As such, it was a federal grant enjoyed only by parents who paid tax.
2021 Child Tax Credit Payments
The American Rescue Plan increased the maximum CTC for 2021 to $3,600 per child under age 6 and $3,000 per child ages 6 to 17. The present-day CTC phases out for single parents making over $150,000 and $200,000 for married parents.
The credit is now fully refundable. If the credit exceeds the parent’s tax liability, they will receive a full CTC “refund” payment even if they paid or owed no tax.
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However, the increased credit is set to expire in 2022, reverting to the prior (2017) level of $2,000 per child. That 2017 credit was phased out for incomes over $200,000 for single parents and $400,000 for married parents. Moreover, refunds of the credit could not exceed $1,400 per child.
Advance Payment of CTC
As a tax refund, the child tax credit would normally be paid out only after you filed a tax return that assesses the tax and only after you have paid the assessed tax. Many taxpayers have to pay tax in advance of filing a return by withholding or estimated tax payments. However, you don’t get a refund until you file a return that assesses the tax liability.
In the context of the CTC objective, that delay is a disadvantage of using the tax system for distribution. With its American Relief Plan, Congress wanted to accelerate the CTC and get it out into the economy sooner than allowed by the regular refund system.
Starting in July 2021, eligible parents will start getting advance monthly payments of the annual CTC. The IRS announced that the first monthly installment of more than $15 billion went out to 35 million families.
The advance payment is 50% of your estimated annual CTC prorated over six equal monthly payments. The IRS will estimate your annual CTC based on various information, most notably your 2019 or 2020 tax returns, or the information you give on your Non-Filer Sign-Up Tool.
The balance of your CTC will be paid out as a true refund after you file your 2021 tax return.
Monthly advance payments will generally be $300 per child under 6 years old and $250 per child 6 to 17 years old. Payments will continue each month through December 15th, 2021.
Those families receiving direct deposits will start seeing them immediately. Checks will take a little longer. Normally, payments are made to eligible families who filed 2019 or 2020 income tax returns. Those families don’t have to do anything to start the payment process.
Families who do not file regular tax returns must file a simplified return implementing the IRS’s “Non-Filer Sign-Up Tool.” The Non-Filer Sign-Up Tool is explained in IRS Publication 5538 located here: https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021
Do You Qualify for Advance Payments?
To qualify for advance payments of the Child Tax Credit, you must:
- File a 2019 or 2020 tax return and claim the Child Tax Credit on the return or
- Give the IRS your information in 2020 to receive the Economic Impact Payment with the Non-Filers: Enter Payment Info Here tool or
- Give the IRS your information in 2021 with the Non-Filer: Submit Your Information tool; and
- Live in the United States for more than half the year; and
- Have a qualifying child under age 18 at the end of 2021 who has a valid Social Security number.
As we explained above, next year, the current CTC reverts to the 2017 version of $2,000 and is only partially refundable. However, presently before Congress is a huge $3.5 trillion reconciliation bill. It includes the extension for an unspecified number of years the present law set to expire in 2022. The fate of the reconciliation bill is uncertain. We’ll continue to follow this and keep you as updated as possible. Check out our Facebook page so you don’t miss any updates!